INSIGHT-Donahue may bring tough love to Puerto Rico power agency

Nick Brown, Megan Davies, Tom Hals

8 MIN. DE LECTURA

NEW YORK/WILMINGTON, DELAWARE, Sept 9 (Reuters) - Puerto Rico’s indebted power authority better get used to some tough love from its new chief restructuring officer, Lisa Donahue, who has earned a reputation for decisiveness, hard work and a cold-blooded devotion to cutting costs.

Donahue, 49, who runs the restructuring practice at New York-based corporate consultant AlixPartners, has played key roles in massive corporate bankruptcies including those of Calpine and SemGroup LP, two energy giants.

“(SemGroup) was a freefall Chapter 11 filed at the last minute,” said Hugh Ray, an attorney with McKool Smith in Houston who opposed Donahue when he represented a committee of oil and gas producers in SemGroup’s bankruptcy. “This was total immersion and devotion and she’s not afraid to fire every other person on the payroll if needed, and she’ll do it quickly.”

Donahue will be spending the foreseeable future commuting between Puerto Rico and her New York home to come up with a solution for the island’s PREPA utility, which has racked up about $9 billion of debt and requires cost cuts and a fundamental change in how it sources fuel.

Solving PREPA’s problems is key to turning around the fortunes of the island commonwealth, which has more than $70 billion of outstanding debt. Electricity rates are double those charged in much of the mainland due to the authority’s reliance on burning oil to generate power rather than cheaper natural gas.

“PREPA is so important to the island, and so important to the Puerto Rican people,” Donahue told Reuters on Friday in her first public interview since being hired. “The stakes are high.”

She will likely be working day and night with unions, politicians and creditors’ committees.

“It’s like emergency room work, only seven days a week,” said Ray, who recalled Donahue fueling up on cold Chinese food late at night while pulling SemGroup through.

PREPA’s bonds, although still trading at distressed levels, have risen sharply since Donahue’s appointment. The 5.25 percent bond due in 2040 is currently trading at an average price of 58.115 cents on the dollar compared to 49.844 cents the day before PREPA named Donahue as its new restructuring officer.

ENERGY EXPERIENCE

Donahue’s energy sector experience will likely be a major plus. She was chief financial officer during Calpine’s two-year bankruptcy in 2006 and 2007, and was credited with taking it through the process.

“Our successful emergence from Chapter 11 was in no small part due to (Donahue‘s) outstanding expertise and leadership capabilities,” William Patterson, then chairman of Calpine, said at the time of its emergence from bankruptcy in early 2008.

The 23-year restructuring industry veteran was also chief financial officer at Atlantic Power Corp when it acquired Capital Power Income LP in 2011.

“Lisa’s experience is working in the energy industry, which is second to none,” said Lawrence Writer, a former colleague of Donahue’s at AlixPartners who’s now chief financial officer of Hillerich & Bradsby, maker of Louisville Slugger baseball bats. “She’s a natural fit” for the PREPA job, he said.

PREPA cited Donahue’s “extensive energy experience,” and said it had “the utmost confidence” in her “deep understanding of what it takes to transform businesses,” in a statement.

At SemGroup, one of the more litigious bankruptcies of the last decade, she helped the company forge a largely-consensual restructuring plan while working through at least four legal disputes with various creditor factions. The company ultimately cut more than 400 workers, and exited bankruptcy controlled by its lenders.

During her tenure at Calpine, the company cut its $22 billion debt load by more than $7 billion, sold some generator assets and reduced its work force by about a third, from 3,300 to 2,200. It emerged from bankruptcy in January 2008 with a plan to fully repay senior bondholders and transfer stock to unsecured creditors. The company’s share price has risen about 40 percent since its emergence, outperforming most other utility stocks along the way.

“Calpine was a very straight story ... they just cut a whole bunch of debt and re-emerged,” said Andrew DeVries, an analyst at CreditSights. “It was entirely driven by natural gas prices. The profitability of the company was very tied to natural gas prices.”

POLITICAL EXPERTISE

Still, Donahue’s experience is rooted in corporate turnarounds. At PREPA, she’ll be expected to navigate what could be tricky political waters.

“Her experience is very much in the business space,” said one restructuring expert familiar with her. “This is a public authority, highly political.”

Many of PREPA’s 8,000 employees are members of the Electrical Industry and Irrigation Workers Union, making job cuts thorny. Meanwhile, Democratic governor Alejandro Garcia Padilla has committed to cutting electricity rates to appease consumers and businesses.

“The biggest issue will be, there’s a lot of wood to chop at PREPA, and will the governor really let it happen?” said a person familiar with the matter, who declined to be identified because speaking publicly about it could jeopardize potential client engagements . “Will he allow things like changing the labor contract, or will Lisa’s work be undermined?”

Donahue told Reuters that while her work has broadly been on the corporate side, she has experience negotiating and dealing with unionized companies, and dealing with multiple constituencies.

“It’s a highly political role when you’re negotiating against multiple constituents, and there’s always politics of some sort involved,” Donahue said.

She will also have staff to fall back on. AlixPartners as a firm is no stranger to politically-charged restructurings, playing major roles in the bankruptcies of General Motors Corp and the city of Detroit.

Donahue’s work in the heavily-regulated energy sector also intersected with California’s political landscape when the state’s former Gov. Arnold Schwarzenegger in 2007 signed a law requiring reduction in greenhouse gas emissions.

BIG FISH, SMALL POOL

Sources said there was only a small pool of candidates for Donahue’s job, which requires an independent person with turnaround and energy industry experience. Such a resume typically commands handsome pay.

AlixPartners collected about $56 million on the Calpine assignment, with Donahue herself billing for $2.8 million over almost 4,000 hours, court documents show. Included in Alix’s compensation was a $6 million success fee contingent on the company’s enterprise value after Chapter 11.

The fee was approved by a judge over the objection of the U.S. Department of Justice, which argued in court papers that Alix made no showing “its service was superior to the quality one reasonably should have expected.”

Fees also caused a stir at SemGroup, where Donahue served as restructuring officer and billed at $795 an hour. Alix itself billed for about $30 million, plus a success fee of nearly $7 million.

A prospective buyer group led by John Catsimatidis, the supermarket operator and later unsuccessful New York mayoral candidate, alleged that at SemGroup, Donahue was more concerned with protecting her income than restructuring the company.

SemGroup eventually won Catsimatidis’ support for a restructuring plan after protracted court battles, and Donahue got her fees. Those in the industry argue she’s worth it.

“She’s good with numbers she will understand the ins and outs of the business quickly. She won’t mince words,” said one restructuring expert. “If you are an investor in this company...you should be very happy.”

Reporting by Megan Davies and Nick Brown, additional reporting
by Edward Krudy and Tom Hals. Editing by Dan Burns and John
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